Many couples with children, during the “earning years”, ask “What is the right amount of life insurance?”
The typical approach is to look at family debts (mortgage, car loans etc) and family expenditures. Insurance companies have software programs that allow you to itemize your car expenses, your house expenses, whether your survivors can get by on margarine instead of butter, and should you replace the car every seven or every nine years. After forty years in the life insurance world, I think that’s over-thinking it!
After forty years in the life insurance trenches, I have witnessed the financial experience of hundreds of families, have delivered many life insurance claim cheques, and witnessed the aftermath of that event in many families. As well, I have heard dozens of stories, brought to me because of my occupation, about the experience of other families who experienced the death of child-rearing age mom or dad.
As a result, I know exactly what I would do if I were a person younger than I am, with dependants. I would put aside all the recommended “sales and planning techniques” for helping people determine the right amount of life insurance, and just keep it simple!
What is simple? If an income is lost, replace it. If the services of a non-breadwinner spouse are lost, have enough money to replace the services provided.
For example, let’s assume a breadwinner age 45 earning take-home pay of $100,000 per year, and expecting to work to age 65. That is potential take-home pay of $2,000,000. That is how much life insurance that breadwinner should have.
In the splitting hairs department, I know a reader will point out that the above example of $100,000 for twenty years ignores inflation and pay raises. Nobody said this was an exact science, but this person with $2,000,000 of life insurance will leave their family in a good position. If you are a fifth year Cardiac Surgery resident earning $60,000 but a few months away from earning fifteen times that, the calculating system might need to be tweaked, but in all these calculations, a little common sense will go a long way.
The hair-splitter will also point out that if the breadwinner is dead, the breadwinner is not spending. True. So maybe knock 10 or 15% off the figure.
Let’s assume the non-breadwinner spouse does all the chores, all the driving, all the shopping, and allows the breadwinner to win bread and not be at home. What if this person dies? What would it cost to replace those lost services? It’s very hard to quantify exactly, but likely in the thousands of dollars per month, needed for many years.
If there is anything less than enough life insurance to cover lost income and services, what happens? Somebody dies, the family suffers the greatest emotional blow possible, and then they have to worry about money and a change in their life. Kids have to stop activities or school, families have to move, holidays get curtailed, and the surviving parent has to seriously think about finding a mate to help carry the load.
With the correct amount of life insurance, somebody dies, the family suffers an emotional blow, but they hold their heads high knowing that things will go on without financial disruption. No need for family or friends to feel sorry, no need to disrupt the current relationship with friends and schoolmates, and if Johnny and Mary are used to getting new hockey gear or ballet shoes every season, they still do.
Very often, an insurance buyer will tell me their family can get by with, say, half of what they now earn. “Get by!” Should that be the objective? Will that person go to their employer and tell them they can get by with a 50% pay cut. I haven’t heard of that ever happening!
True story – A friend was diagnosed with a brain tumour (he survived). He told me that, amongst all the anguish and worry, he felt very proud and confident for his family, because he had the right amount of life insurance. My hope for those who don’t have enough life insurance for the family to continue comfortably, is that when they go, they don’t linger. I can’t imagine being in the hospital bed and telling my wife anything other than “you have nothing to worry about”. Especially when all family members and friends know that the sick person had the resources and brains to get the right amount of life insurance, if they wanted to.
The reality is that there is no “right answer”. None of us know what the future holds for rates of return, inflation, or the family’s ability to get through the death of a loved one.
So keep it simple, don’t get bogged down in details, and own an amount of life insurance that will do the job!